Click the image below and find out what stock Spicer Capital has chosen for our Top Stock Pick for the month of May !
Rather read? Check out the video transcript below!
Our top stock pick this month has incredible growth potential is in a recovering and rapidly expanding industry. Based on our calculations is currently extremely undervalued with an
over 100 percent upside potential. Has limited downside risk in part due to its healthy balance sheet and as of this recording pays a 7 percent dividend. All the details coming up.
I am thrilled to share our research with you today.
At Spicer capital we are dedicated to helping you build your rapidly growing highly diversified net worth one video at a time and one of the ways we do that for ourselves and our clients is through individual stock selection. I'll be
sharing our top ideas right here each month so if you haven't already consider subscribing.
I first have to disclose and want to disclose that as of this recording we are long this stock that is to say we own shares in this company. I own it in my own portfolio and we hold it in most of our clients portfolios as
well. The information I share with you in this video should not be taken as a recommendation that you buy shares yourself. I do not know your personal situation and if this stock would make sense for you specifically and as you
know from this video I don't want you to invest based solely on any idea. I am simply presenting you with our research that's a good place for you to kick off your own. As long as we're on the same page there let's jump into the stock.
Hi-Crush Partners HC LP.
It supports the oil and gas industry which suffered through a bear market in 2015 and 2016 and with that fresh in their minds. A lot of investors are hesitant to jump back in. Most importantly Hi-Crush provides sand used in the oil fracking process. It's not my favorite sub-sector within the oil industry (Homer Simpson Quote) "you don't know anything about hydraulic fracturing you've just been brainwashed by liberal TV shows who use fracking as an easy bad guy but it could save this country." but the opportunity is undeniable. Now, fracking sand may not mean anything to you but the demand for sand has been increasing considerably. Sonny Randhawa a director and Senior Research Analyst at seaport Global Securities expects frac sand demand to increase to 100 million tons in 2018 and 115 million tons in 2019 and that's up from 82 million tons in 2017 and Hi-Crush is strategically situated to service the major extraction sites in the continental United States. On top of that last year they completed construction on their Kermit facility the first supplier of in Basin sand in the coveted Permian Basin this means that they can put the sand and directly onto trucks from within the basin itself they don't have to rely on trains to get it there and that's recently been a problem in the frac sand industry. Well this plan at least won't be affected by any rail delays and about 80 percent of the demand inside the Permian is within a 50-mile radius of Hi-Crushes facilities.
Now I could go on with the other basins the other extraction sites and the rest of the infrastructure the assets that they have to take advantage of this demand increase but suffice it to say they are well positioned for this increase in demand including that huge first mover advantage with their Kermit facility. Hi-Crush has a market cap of around 1 billion dollars and if you haven't seen our video explaining why some amazing investment opportunities exist in the world of small caps you should check that out video that'll help provide you context for many of the ideas you'll see here on this channel.
So what about Hi-Crushes competitors. The closest two companies in the industry are US Silica Holdings that's SLCA which has a market cap of around 2 billion and Fairmont Santrol Holdings FMSA around 1 billion dollar market cap. Hi-Crush has a price to earnings ratio or p/e ratio of around 12 so for every dollar of earnings investors pay roughly $12. Silica's PE is around 15 Fairmont around 21 and the industry is around 18 so by that measure Hi-Crush is undervalued. It's price-to-book or PB ratio is 1.3 so investors are paying around 1.3 times the value of Hi-Crushes assets Silica's PB is 1.6 Fairmounts is 3.6 but the industry as a whole is right there around 1.3. Hi-Crush currently has a dividend of 80 cents per share which at the time of this recording represents a dividend yield of 7% and that's a big deal compared to its competitors. Because Silica's yield is only around 1% and Fairmont doesn't even have a dividend at this point. Hi-Crush appears to operate more efficiently than its competitors. For example: its CEOs compensation is around 1.6 millioncompared to 4.7 million for Silica’s. Also Hi-Crush only has around 100 employees compared to the 2200 of Silica and the 1,000 of Fairmount.
Hi-Crush insiders and this part is important they own about 14% of the company. You can compare that to Fairmont with about 9% which is fine Silica where they own less than 1%. Remember the insiders are the ones who really know what's going on and so it's a good sign if they own some of the company.
Now here's one of my favorite parts. Some fuel for our potential growth fire. Institutions only own about 35% of Hi-Crush shares and it's not that they're averse to the industry with Silica for example institutions owned over 100 percent of the shares I'd say they like the industry even Fairmont which is pretty much the same size has almost 90 percent institutional ownership. Fairmounts quite a bit older. Hi-Crush was formed in 2012 but whatever the reason Hi-Crush only has about 35% institutional ownership and if you remember from that video I referenced before about why we look at small and micro cap companies as institutions are able to start piling into a promising
growing company like Hi-Crush their indiscriminate demand can cause prices to surge.
Now when we first entered our positions and mentioned Hi-Crush partners to the insiders through our exclusive Patreon content we were able to get in at $11.04 that makes our dividend yield about seven point two five percent. I'm not a short-term investor so the fact that as of this reporting the stock is up three percent since we got in it doesn't mean much to me if it were down by that same amount I would still be releasing this video my time horizon is a little bit longer I don't make any assumptions about when the market will come to their senses on a particular
issue like this I'm expecting the market to realize the company's fair value maybe in a year or so again I believe to be over 100 percent higher than where it is today but the longer it takes for the market to do that barring any industry disruptions I believe the case for Hi-Crush will become even stronger and I will likely be if that happens I will likely be increasing my positions which of course would be updated in real time for all of you Patreon insiders.
I mentioned industry disruptions I believe that is the major risk here as with all investments there are several unknowables and a big one for this industry is the supply of oil. Decisions by individual governments or by OPEC could once again negatively affect oil prices for everyone and consequently the oil industry everywhere including here and including the companies that support the oil industry that's a big reason that I personally only invest in a company in this industry if it has a healthy balance sheet and Hi-Crush does. It has a debt-to-equity level below 25% compared to silica with 36.7% which is still fine and Fairmont with 235 percent. It’s earnings are about eight point five times its interest payments and its annual operating cash flow is almost 50 percent of its total debt all of those contribute to a healthy and favorable balance sheet should anything happen they should be okay relative to their competitors.
So by now you know that the industry is growing rapidly that Hi-Crush is uniquely situated to capitalize on that growth that Hi-Crush compares favorably to its competitors in that space that there is a potential catalyst with the current lack of institutional ownership. That you get paid to wait with the six or seven percent dividend depending on when you're getting in and now you know why I believe Hi-crush will fare better should something unexpected significant and negative happen.
Even if it wasn't undervalued today for all of those reasons this would be my pick within the industry. But based on our calculations which should just serve as a guide not a price target we believe the current fair value is over $24 per share today it trades around eleven to twelve dollars per share now we took the company's expected future cash flows as well as our reasonable conservative projections and assigned them a discounted cash flow value what would be a reasonable price today for those income streams going forward and when we took that total resulting value and divided it by the number of shares that's where we came up with a number of slightly over $24 per share.
Again this is not a price target. I'm not a fan of targets I'm not trying to predict the future but as the industry and this company stand today we would call $24 dollars a share fair. Somewhere around that realm would be fair.
Obviously between now and the time the market realizes and accepts this that fair value number will change as the underlying variables in the calculation inevitably change.
If you're looking for ongoing analysis and updates from us and our research then you should check out our Patreon page. As an insider that's where we answer every single question about the stock and our research and provide any updates to a portfolio or general expectations that have. Or if you want to follow everything to a lesser degree then you can follow us on twitter @SpicerCapital
Now I hope this has been helpful for you I hope it's given you an idea or some ideas again this is not meant to be specific investment advice. I encourage you to do your own research and I'd love to hear about it in the comments below let me know what what you think let me know what your research says or what you think of this research that we've done that's how we can really make the best decisions for our portfolios and I think together that's the best way to do that so definitely leave your comments and read other people's comments and let's start that conversation so that we can find the best investment opportunities.
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I wish you all the best, take care.